Learn About Marginal Product of Labor in Economics: Definition, Examples, and Impact on Economy

The marginal product of labor (or MPL) refers to a company’s increase in total production when one additional unit of labor is added (in most cases, one additional employee) and all other factors of production remain constant. In other words, the MPL is the additional output a company experiences after hiring another worker.

The marginal product of labor is usually a positive number during early hiring of workers, but does not usually show constant returns—the MPL will always begin to slow as the number of laborers increases, and they, therefore, must begin sharing resources like equipment during the production process.

Eventually, the MPL becomes negative, when hiring an additional worker would disrupt the company and cause a decrease in production. This is called the law of diminishing marginal returns.

A good example of the marginal product of labor is a kitchen in a restaurant.

• With no cooks, the restaurant’s production will be 0.
• When one cook is hired, the restaurant’s production may increase to 10 meals, yielding a positive MPL of 10.
• When a second cook is hired, the restaurant’s production may increase to 18 meals, yielding an MPL of 8.
• A third cook may yield an MPL of 7, and a fourth cook may yield an MPL of 5.
• For each new hire, the marginal productivity remains positive (in other words, the output increases) as the kitchen space and duties can accommodate each new cook.

In this example, the law of diminishing marginal returns is already at work: each cook does not provide the same 10-meal MPL as the first. This is because, to measure the MPL, only the variable input (in this case, the number of workers) can change, while all other factors of the company must remain constant—and that means the kitchen facilities stay the same.

As each cook is hired, the team must share resources like ovens, counter space, and cutting boards, and the marginal productivity of labor cannot increase by the same margin that it did when the first cook was hired.

In this hypothetical restaurant, four cooks can produce 30 meals; but let’s say the restaurant hires a fifth cook, and the restaurant realizes it is now producing only 28 meals. This is an example of a negative marginal product of labor—at a certain point, additional employees will not yield extra output, and will instead get in the way in the company’s limited facilities and will disrupt the other workers as they wait for things to do.

The marginal product of labor can be determined by calculating the following:

MPL = change in output / change in labor

It is often represented with the following shorthand formula, called the production function:

MPL = ΔY / ΔL

The marginal product of labor is important because it’s a key variable in another calculation: the marginal revenue product of labor (or MRPL), which is the change in total revenue (rather than just total output) when one additional employee is hired and all other factors remain constant.

• The MRPL takes into account the marginal value of each additional product, or how much money the company makes by producing one more product. According to the marginal productivity theory, companies maximize profits when their marginal cost of labor equals the marginal revenue product of labor.
• By tracking their MRPL, companies can see their diminishing returns and can identify when an additional worker would not create enough revenue to outweigh their wage rate. In this way, companies can make informed hiring decisions by determining the best number of workers for their facilities at the market wage.
• The MRPL determines the labor demand curve for a company and shows that companies will demand labor until their MRPL equals their marginal cost of labor. The demand curve can be shifted in the short run by changes in productivity of labor, the relative price of labor, or the price of output.

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